Cola Wars paper

A1) Porter’s five forces analysis of why this industry has been profitable:

Threat of new entry – Extremely low
There are many different barriers to new entry in the CSD industry. Some of them mentioned in the case are:
Bottlers – Pepsi and Coke have exclusive franchisee agreements with a lot of bottlers since they are a crucial step in the chain.
The exclusivity of these restricts the bottlers from working with anyone else so newcomers would be at an extreme disadvantage having to do this in-house.
Bottling is the most expensive part of the chain so this would increase the cost to entry since the firms would need a very large capital investment to start off with. New plants with a 40 million-case bottling capacity costs $75 million in 2005.
The acquisition, consolidation and tight integration of the bottlers with the concentrate producers, results in very few bottlers who would want to work with any newcomer to provide distribution.
The geographic area rights in perpetuity, provided in the negotiated agreements, incentivize the bottlers to stick with their current clients.
Brand Loyalty: Coke and Pepsi have a large amount of Brand equity, which seems insurmountable to the competition, especially if just entering the market.
Expenditure on Advertising and Marketing: The new entrants cannot even begin to compete based on the high costs of advertising and marketing, which are borne primarily by the concentrate producers. In 2004 these would have been almost $3.46 billion (0.51 per case * 6.8 billion cases).
Price undercutting, a strategy frequently employed by Pepsi and Coke, would drive out new entrants as they would be squeezed on their margins constantly and would not have the advantage of economies of scale in the beginning.
Retail Channel: Entrenched relationships with Coke, Pepsi and Cadbury Schweppes are hard to compete against as a new entrant.
The channel members are heavily incentivized at the cost of profitability of the concentrate producers in some cases (Coke and Burger king, Page 4); a move that a new entrant can just not afford.
Together the big players have taken control of buying, installing and servicing vending machines as well as developing vending technology.

Buyers – Can exert power and discriminate but managed through partnerships
The buyers are the channel members and include Supermarkets, fountain outlets, vending machines, mass merchandisers (Super centers, mass retailers, club stores), convenience stores, gas stations and other outlets. Their power to exert downward pressure on prices depends on their share of industry volume (relative to other buyers) and their cost of switching to another brand.
Coke and Pepsi have been able to consistently maintain profitability by testing price sensitivities with expanding products, innovating to drive impulse purchases and target different segments using separate retail channels. A big reason behind this profitability is also the partnerships and ongoing investments concentrate producers and bottlers have maintained with the retail channel to distribute CSDs.

Supermarkets: CSDs are a big draw to the supermarkets and annual sales reached $12.4 billion in 2004. Since they result in the highest volume of distribution, the existing duopoly fights very hard for shelf space, which is at a premium. Impulse purchases and expanding product lines keep profitability consistent.
Fountain outlets: Many existing producers are already incentivizing fountain outlets to carry their product (like Coke to burger king) despite a hit on their profitability. The expectation is that over time this may lead to high profits due to consistent recurring sales.
Vending machines: The bottlers have taken over the buying, installing and servicing of machines while incentivizing store owners with negotiated contracts. Concentrate producers encourage this investment and also play a role in the development of vending technologies.
Mass merchandisers: An…

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Cola Wars
1. Is the industry that Coke and Pepsi compete in an attractive one? What about the CSD bottling industry? What have profits in each industry looked like historically?
Concentrate Manufacturing appears to be attractive with large margins and low capital requirements
Bottling has much lower margins and expensive capital requirements
Coke & Pepsi’s domestic operating margins have been increasing whilst international operating margins appear to be declining or stagnant.
Pepsi…

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Why historically, has the soft drink industry been so profitable?
There are multiple reasons why the industry is so profitable. Using Porter’s 5-forces model we have the following factors: Availability of the substitute, thereat of new entrance (barrier of entry), bargaining power of the seller and the buyer. First, concentrate producers and bottlers working interdependent, which benefit most CSD producers outsourcing these services and…

concentrate producers.
3. Coca-Cola and Pepsi grabbed the majority of the carbonated soft drink industry, converting it to a duopoly, by differentiating their products and competing directly with each other through non-price competition, which in the end allows them to charge higher prices and improve industry and company profitability. The once fragmented CSD industry has remarkably changed over the years. “Among national concentrate producers Coca-Cola and Pepsi-Cola claimed a combined 74.8% of the…

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The Coca-Cola Company (Coca-Cola) is known for manufacturing, distributing and selling carbonated soft drinks through restaurants, stores and vending machines in all over the world. Coca-Cola is one of the world’s largest manufacturers and distributors of beverage products. The organization has operations in over 200 countries and selling on average…

information regarding the other company’s intended course of action. As a result of the cola wars, bottlers were pressured to increase spending on marketing and promotion, new packaging and product, and allow for widespread retail discounting. There are different “battlefields” on which Coke and Pepsi compete, such as marketing, bottling decisions, formula, and alternative products. On the marketing field, Coca-Cola claimed to be “American’s Preferred Taste” in 1955. Pepsi launched the “Pepsi Challenge”…

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Threat of new entrants: Medium
The entry barriers for new entrants are relatively low, since there are no switching costs and capital requirements are relatively low. As mentioned in the case, a typical concentrate manufacturing plant that could cover the region of the entire United States cost between $50-100 million to build. However, Coca Cola and Pepsi have a significant brand advantage, and have claimed 72% of the US CSD market share. Consumers have developed brand loyalty and…

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market. “The most intense battles in the so-called cola wars were fought over the $74 billion carbonated soft drink (CSD) industry in the United States.” Although still in the lead, recent sales of CSD have declined. For years, the rivalry between Cola and Pepsi has provided a competitive advantage for both parties, motivating each to do whatever is necessary to stay on top.
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Cola Wars Continue: Coke and Pepsi in the 21st Century
Concentrate Producers and Bottlers were two of the four major participants that were involved in the production and distribution of Carbonated Soft Drinks (CSDs) in the United States.
The Concentrate Producers (CPs) were responsible for blending raw material ingredients, packaging the blend in plastic canisters, and shipping it to the Bottler.
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